Sunday, August 17, 2014

Cumulative voting is designed to protect minority owners

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article reprints or distribution. Los Angeles Times, Real Estate Section,
"Associations Q&A" August 18, 2014 Cumulative
voting is designed to protect minority owners
By Stephen Donie Vanitzian, Special to The Times

Cumulative voting is designed to protect minority owners

By Donie Vanitzian

QUESTION:We recently
bought a home in a large development with a homeowner association and are new
to the concept of boards and this type of living environment. We're told the
same directors have been on the board and controlling the association for over
13 years. The directors said their attorney and management company advised them
to get rid of cumulative voting. They're campaigning for owners to
"support the board" in eliminating cumulative voting. We're uncertain
how to vote. What's cumulative voting, and why does the board want to eliminate
it?

ANSWER:Ridding the
association of cumulative voting has nothing to do with "supporting"
the board and everything to do with disenfranchising minority owners under a
mask of "fairness."

A caveat to fairness in cumulative voting is that only titleholders should be
allowed to vote and no single owner, including the developer, owns the majority
of properties. Where the common interest development is not yet completed, the
association has a developer-controlled board of directors or the developer owns
majority shares or properties, more often than not, those cumulative votes
favoring the developer are designed to outweigh and outvote all other voters.

Under Civil Code section 5115(c), if the governing documents provide for
cumulative voting, the association shall allow for cumulative voting using the
secret ballot procedures provided in Section 5115. An article or bylaw
provision authorizing cumulative voting may be repealed or amended only by approval
of the owners (defined in Corporations Code section 5034) except that the
governing article or bylaw provision may require vote of a greater proportion
of owners for its repeal, under Corporations Code section 7615(a).

Cumulative voting allows the titleholder to multiply his votes by the number of
directors to be elected. The owner may vote this cumulative total for a single
candidate or distribute his votes among any number of candidates (the total
number of his votes being equal to the number of shares he is voting multiplied
by the number of directors to be elected). In any election of directors by
cumulative voting, the candidates receiving the highest number of votes are
elected, subject to any lawful provision specifying election by classes, according
to Corporations Code section 7615(c).

The purpose of cumulative voting is to ensure minority interest representation
on the association's board of directors. While majority board directors may not
use their power to control corporate activities to benefit themselves alone or
in a manner detrimental to the minority, without adequate representation abuse
of the process becomes a common occurrence. Any use to which directors put the
corporation or their power to control the corporation must benefit all members
proportionately. Such conduct is inconsistent with a director's duty of good
faith and inherent fairness to minority owners, courts have found.

Titleholders have valuable property rights that vest at the time of their
property purchase. Concerned about minority disenfranchisement, courts
recognize that although a dollar amount as compensation for such
disenfranchisement might be speculative, the "damage is real" and
"equity demands that minority members be placed in a position at least as
favorable as that which the majority created for themselves."

The destructive consequences of an entrenched board far outweigh the fears that
cumulative voting will upset the status quo. Recalcitrant directors intent on
remaining on the board begin by amending and rewriting governing documents,
inserting terms favoring their reign, eliminating cumulative voting, making
decisions outside of meetings and implementing rules with iron fists. However,
those actions can have unintended consequences such as reducing individual
titleholder wealth through disenfranchisement on the one hand and devaluing
property on the other hand. When the minority's vote does not carry the same
weight as that of the majority, the minority's worth is lessened.

The purpose of cumulative voting is neutralized when an association (1)
staggers terms directors in office can serve; (2) campaigns for or recommends
certain candidates, or presents a slate of nominees to be elected together to
fill board positions; (3) has annual elections for only one class of directors
each year; (4) forces votes by acclamation rather than by nomination that
includes proxies and ballots; (5) forces a vote by voice or show of hands; (6)
calls for a voice vote of "ayes" and "nos," (7) keeps the same
board directors year after year; (8) removes all proxy voting.

Majority directors who get control of the board then do as they please with
support from the majority and leave minority owners in the dark, effectively
disenfranchising minority voters. The minority then has no one on the board to
watch its interests, to protect against waste, extravagance or mismanagement.
Couple those actions with a management company vendor that in essence resorts
to aiding and abetting the board in order to continue its contract renewals. Through
these types of actions, the majority, having obtained absolute control of the
association's operations, banking and financial proceeds, along with
"unlimited legal paid advice," is free to plunder and abuse its
positions of trust with impunity.

The object of cumulative voting is not to tie the board's hands but to protect
the minority from disenfranchisement for the want of some representative to
look after their interests.

1 comment:

Coto de Caza's CZ Master Association board of directors has been in power for more than a decade, and instead if using direct elections, it has consolidated its powers by extending the period delegates serve- delegates are the ones who select the directors.

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